6 Key tax options to consider when you’re exiting or selling a company

6 Key tax options to consider when you’re exiting or selling a company

The process of selling a business is as unique as the business itself. It’s a major decision, and there is no set ‘right’ time to do so. Whether you’re looking to sell up completely, or you’re considering alternative succession planning options, there are a lot of factors to consider.

Reviewing your tax options is key to solid succession planning which will stand you, your business and your employees in good stead. No matter what your goal is, having the right tax structure in place can have transformative outcomes when it comes to succession planning.

When planning to sell your company, you should consider tax options at the earliest opportunity to ensure your business is as efficient and valuable as it can be.

No business is the same, and whilst selling a business remains a topic of high interest for owner-managers, you may want to consider alternative options to selling to a third party. To ensure you find an exit strategy that suits your goals and the needs of your business, consider the following 6 tax options for your exit strategy:

1. Considering capital gains tax and business asset disposal relief

The rate of capital gains tax (“CGT”) payable on the sale of shares is generally 20%, if the seller is a higher rate taxpayer. Depending on the size of the gain a basic rate taxpayer may also pay CGT at 20%.

The annual exemption can be set against the gain arising but this is set to shrink from £12,300 in 2022/23 to £6,000 in 2023/24, and then again to £3,000 in 2024/2025.

Business asset disposal relief, formerly known as entrepreneur’s relief, offers a lower rate of CGT on the sale of assets and shares of a trading business up to £1 million per person

If you have been trading for at least two years prior to selling your company; your business is a going concern and you own 5% or more of the ordinary shares, you could be eligible. The relief means you will be liable to pay just 10% CGT on any gains you make from the sale of your shares which are covered by the relief.

2. Pre-planning any tax incentives and reliefs before selling a business

As with all tax reliefs, it’s important to understand not only how they can help your business, but also the wider context and landscape in which you are seeking tax advice.

There’s no doubt that incentives and reliefs can be a great way of aiding growth, increasing profitability and in turn the value of the business, but we would always recommend seeking expert advice if you are planning to utilise the tax reliefs on offer in the UK when selling your business.

You can consider Incentives and reliefs if…

• Your business is innovating - Research and Development (R&D) tax relief encourages innovation in the UK by offering tax relief to businesses who work to further scientific or technological knowledge within their field.

• You’ve invested in plant and machinery- Capital Allowances can be claimed if you have invested in equipment, machinery or commercial property. Any business that invests in plant and machinery can deduct the investment cost from their annual profits which in turn reduces their corporation tax liability.

• You have or are applying for a patent- Patent Box offers businesses who own, or are in the process of applying for a patent, a tax saving of the overall profits that are directly linked to the patented product or process.

These three tax reliefs aren’t mutually exclusive, they can be used in tandem with one another to really maximise the value of the reliefs on offer if your business is eligible.

3. Tax structuring for maximum compliance and efficiency

If your business has multiple divisions, it’s worth looking into how this can be better structured for exit planning purposes.

This could include setting each division up as a separate company within a group structure. It’s not only good practice to do this, with a greater transparency into a business’ operational units and an increased compliance, but it can also pay off in the tax planning process.

If implemented early, divisions of the company can be sold on tax-free, as long as the subsidiary company has been held in the company for at least 12 months.

4. Selling a business through management buyouts (MBO)

In the current climate where an increasing number of businesses are faced with financial unpredictability, owners who were considering selling a business in the long-term might now be considering bringing their plans forward. On the flipside, with more business owners potentially looking to sell, attracting a buyer may be becoming more difficult and it can be a very long-winded process at the best of times.

Considering a management buyout not only allows you to save time waiting for a potential buyer and then negotiating, but also creates exciting prospects for your current management team. With a team you already know and trust taking the reins, an MBO could offer a smoother sale process with a higher degree of control.

Again, business asset disposal relief can be utilised as part of your MBO strategy, making it a tax efficient option for your exit too.

Alternative succession plan options

A conventional sale may not suit every situation and other exit options may be more appropriate. Employee ownership trusts for example allow you to pass on your legacy to your employees, and share buyback schemes allow your company to buy just your shares back if the other shareholders do not wish to sell. Both present key benefits tax and employee benefits that may not be as prevalent when selling a business completely.

5. Passing down your legacy through Employee Ownership Trusts

Employee Ownership Trusts (EOTs) are one of the fastest growing models of business in the UK. They are also becoming a favoured means of succession planning by business owners across a range of different industries.

An EOT which is a special form of employee benefit trust is set up with a corporate trustee. The shareholders sell their shares in the trading company to the EOT under a sale and purchase agreement. The purchase price creates a debt owed to the shareholders by the EOT which the EOT repays from future profits generated by the trading company.

An EOT provides an exit route where there is no immediate MBO team and does not require a third party sale. It allows employees to indirectly buy the company from its shareholders without them having to use their own funds. Bonuses of up to £3,600 per employee per annum can be distributed as tax-free profit-share by the EOT-controlled company.

Unlike a share buyback or sale to a third party no capital gains or income tax liabilities should arise on the disposal of the trading company to an EOT.

6. Share buyback scheme

Companies can use their reserves to buy back shares from a shareholder looking to exit. This is a practical and potentially more tax efficient alternative to the shares being bought directly by other shareholders.

The default position for tax purposes is that the proceeds of a share buyback (over the capital element) are treated in the same way as income dividends and subject to income tax at effective tax rates up to 38.35%.

If, however, certain conditions are met a payment made by a company for the buy back of shares is not a dividend, but a capital receipt in the hands of the seller. If capital treatment applies the gain will be subject to CGT, rather than income tax and business asset disposal relief could reduce the amount of CGT to 10% overall.

Supporting you with tax and exit planning

Looking to selling a business can be a daunting task. It’s often the cumulation of years’ worth of hard work, sometimes even through generations of your family. So being able to achieve the right outcomes for you, your business, your team and wider stakeholders is understandably a key priority.

No matter where you are in your journey to selling a business, our team of qualified tax advisors are on hand to ensure that your succession planning is as smooth as possible.